Sometimes the cure is worse than the ill: an occasional look into the life of LSE DESTIN 2010

What is Making Mexico a Success Story?

If one reads The Economist special report about Mexico, one is left with little doubt: Mexico is poised to be a success story. In the report, success is defined as growth of the GDP[1] and the spectacular GDP growth rates achieved by Mexico stand witness to Mexico’s success. Whether this success will continue into the future however depends on the sparks of the success (defined as GDP growth) and not on the success itself: the fact that Mexico is doing well today does not imply that it will do so in the future. Many analysis conflate what sparks success and what signals it thus confounding short-lived successes with a long-lasting one. The conventional wisdom today holds for example that Africa is a rising continent because of its growth rates whereas others argue that such growth is bound to be short-lived because it is linked to a boom in commodity demand and not underpinned by strong manufacturing capacity. In other words one should look at the fundamentals of growth not at the growth itself.

This post will examine Mexico and its success story on the basis of The Economist report and spell out the igniters and symptoms of Mexico’s GDP growth.

Hecho en Mexico. Mexico is fast becoming one of the world cheapest place to manufacture goods destined for the United States market. China’s wages are rising, hauling is becoming more expensive and the economy is shifting more towards consumer spending. Mexico on the other hand offers competitive wages, a qualified workforce and proximity to the big market of the US. Companies are therefore relocating their production to Mexico to shorten supply chains and reduce costs since quicker delivery times means less money invested in inventories. The country is poised to become one of the world biggest workshop. Mexico’s growth is based therefore on manufacturing and exporting high value goods such as cars, television, flat-screen television and fridges. A diverse and solid manufacturing sector and access to big markets for export make the growth of a country more long-lasting: this is a spark of success. Another cause of success is the access to credit for enterprises: everything held constant, the more credit injected for enterprises the more the investments. Mexico has traditionally suffered from a credit drought, legacy of banks cleaning up their account balances and reluctant to lend. However, banks are starting to turn up their credit tap. This in itself is a good news for a country where lending constitutes 26% of the GDP compared to 61% in Brazil. Access to credit destined for enterprises is a cause of success and Mexico has the potential to improve considerably on that front.

Next post will look at other igniters (real or presumed) of GDP growth: security, migration and demography.

[1]The definition of success as GDP growth is controversial as it associates that poverty reduction follows from GDP growth. Economic growth raises the boat on average for everybody yet it creates inequalities too with some left behind. The Economist report leans sometimes towards the poverty reduction definition of success when it refers to social security programs. Yet it overwhelmingly refers to success as GDP growth. This post makes the distinction between success as economic growth and success as poverty reduction and focuses on the former one. It does so because it acknowledges that factors causing poverty reduction overlap but do not coincide with economic growth.